Business News

Market madness or sensible reaction?

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by Peter Switzer

Wall Street went positive (but only just) and it poses the question, has this sell-off been overdone or is there good reason to be spooked?

I think it is a bit of both. The US economic question marks added to the latest European debt challenge – namely Italy – are good reasons for an investor to be very wary.

But more relevantly, the above description of the issues scaring investors is the perfect environment for short-sellers and hedge funds to do what they do best.

It is a good sign that Wall Street has fought back out of negative territory and it has to be remembered that a very important jobs report comes out on Friday — US time — and so we will see the market reaction to those figures on Saturday morning.

This means my first television destination on Saturday morning won’t be to Fox Sports to see who won the footie but to the business channel!

A better-than-expected number could turn around some of this negativity but the rest will depend on the EU and Italy proving that the market has overreacted. Right now the bond vigilantes are trashing Italian bonds — selling them off and driving down their prices — and this pushes up their yield or the effective interest rate on these bonds.

The Dow ended up 0.25 per cent higher to 11,896.4 but the S&P 500 did better putting on 0.5 per cent to finish at 1260.3.

History was up against a ninth day of falls. This has not happened since February 1978 and so it shows what tricky territory we are in right now.

What I did like was seeing the VIX or fear index drop from around 24 to 23. Against this, gold made new records and the oil price fell, which says the market is afraid of the unknown that could KO global growth. US light, sweet crude oil was down to around $US92 a barrel.

To the US economy, the ISM for services showed a drop and factory orders were also down. But the good news was that the private sector actually added 114,000 new jobs in July. This was better than expected – this could provide some hope for Friday’s job report.

Start with Italy and add in the economic question marks over the US and it makes sense that the market is down but I don’t think the Yanks are down for the count.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Thursday, August 04, 2011

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